alleges that the defendants offered training, support and perpetual assistance and guidance in the operation of the three restaurants in order to help compensate for his lack of experience in the industry. None of this assistance was ever forthcoming. Furthermore, Protter contends that Nathan's misrepresented that the profit margins of its franchises were higher than that of its competitors as a result of its limited menu and reduced labor and food costs. Specifically, Nathan's represented that Protter could reasonably expect food costs to comprise 24% of sales, labor costs to comprise 22% of sales, and an after tax cash return of 25%, notwithstanding the defendants' knowledge that these figures were inaccurate.
Moreover, Protter asserts that the defendants misrepresented the franchisor's overall success. For example, Nathan's represented that many of their company-owned stores were highly profitable in an effort to induce Protter's purchase of the franchises. Yet Nathan's failed to explain that in December 1992, sales for Coney Island Hot Dogs, Inc., a multiple unit franchisee operating in the northeast had a 24.7% decline in sales with individual stores experiencing declines as high as 46.5%. Moreover, sales declines were pervasive in 1993, culminating in a 12.9% decline in December 1993. Similar declines were experienced by Nathan's largest franchisee in Florida, Coney Island Hot Dogs of Florida, which had a 26.5% decline in sales in December 1992 with individual stores losing as much as 30.7%, and declining sales throughout 1993 culminating with a 17.3% drop in December 1993.
Protter further alleges that Nathan's misrepresented its resolve with respect to its purported use of the $ 15 million raised in the initial public offering. The plaintiff alleges that he was told that those funds were to be allocated towards improvement of the franchisor's infrastructure and the opening of 19 new company-owned restaurants. Since then however, no steps have been taken to implement this program.
The Amended Complaint further alleges that Nathan's stated that it would approve all site locations and menus to maximize use of space and customer preferences. Yet with respect to the restaurant located at 389 Avenue of the Americas, the defendants never informed plaintiffs of the failure of a company-owned store located across the street ten years earlier.
In addition to these misrepresentations, Protter alleges several omissions of material facts in order to induce the franchise sales. Specifically, the plaintiffs refer to the defendants' failure to disclose significant hidden costs associated with running the franchises and the severity of sales declines that other stores were experiencing over the last several years; that other franchises had found themselves in a variety of financial difficulties at the time the plaintiff entered into the Franchise Agreements; that prior to entering the franchise agreements the defendants failed to admit that they were parties to lawsuits; and that the defendants received kickbacks from third parties, presumably for referring the plaintiff to these third parties for services rendered while operating the franchises.
Finally, Protter asserts that he was not the only franchisee to have been defrauded by the defendants. The plaintiffs claim that from September through November 1993, one Steven Lenter ("Lenter") was also persuaded to purchase a Nathan's franchise based on misrepresentations and omissions similar to those outlined above. The plaintiffs also submit an affidavit from Daniel Rapoport (Rapoport"), owner of Bay Plaza Famous, Inc., a Nathan's Famous franchisee. Like Protter and Lenter, Rapoport claims that he was defrauded by Nathan's into purchasing a franchise. The Court expressly notes however, that the Amended Complaint contains no allegations with respect to Rapoport and the Court cannot consider the affidavit on a Rule 12(b)(6) motion to dismiss.
Protter claims more than $ 1.8 million in damages, including franchise fees, construction and equipment expenses, legal expenses, and rental expenses due to the delays in opening the restaurants, all as the result of the defendants' unlawful activities. In addition, Protter asserts that by virtue of the promised 25 percent return, he has lost $ 1 million in profits and stands to lose another $ 10 million. As a result, he seeks $ 13,088,359 in monetary damages.
A. The standard of review
On a motion to dismiss for failure to state a claim, "the court should not dismiss the complaint pursuant to Rule 12(b)(6) unless it appears 'beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Goldman v. Belden, 754 F.2d 1059, 1065 (2d Cir. 1985) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957)); see also IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1052-53 (2d Cir. 1993). The Second Circuit stated that in deciding a Rule 12(b)(6) motion a Court may consider "only the facts alleged in the pleadings, documents attached as exhibits or incorporated by reference in the pleadings and matters of which judicial notice may be taken." Samuels v. Air Transport Local 504, 992 F.2d 12, 15 (2d Cir. 1993); see also Rent Stabilization Ass'n of the City of New York, v. Dinkins, 5 F.3d 591, 593-94 (2d Cir. 1993), citing, Samuels, 992 F.2d at 15.
It is not the Court's function to weigh the evidence that might be presented at a trial, the Court must merely determine whether the complaint itself is legally sufficient, see Goldman, 754 F.2d at 1067, and in doing so, it is well settled that the Court must accept the allegations of the complaint as true, see LaBounty v. Adler, 933 F.2d 121, 123 (2d Cir. 1991); Procter & Gamble Co. v. Big Apple Indus. Bldgs., Inc., 879 F.2d 10, 14 (2d Cir. 1989), cert. denied, 493 U.S. 1022, 107 L. Ed. 2d 743, 110 S. Ct. 723 (1990), and construe all reasonable inferences in favor of the plaintiff. See Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974); Bankers Trust Co. v. Rhoades, 859, F.2d 1096, 1099 (2d Cir. 1988), cert. denied, 490 U.S. 1007 (1989).
The Court is mindful that under the modern rules of pleading, a plaintiff need only provide "a short and plain statement of the claim showing that the pleader is entitled to relief," Fed. R. Civ. P. 8(a)(2), and that "[all pleadings shall be so construed as to do substantial justice," Fed. R. Civ. P. 8(f).
B. The defendants' motion
The defendants move to dismiss the Amended Complaint in its entirety on several alternative grounds. Initially, they argue that the plaintiffs' claims are time barred based on the franchise agreements' provision requiring that all lawsuits arising thereunder be brought within one year from the date they accrue. Alternatively, the defendants contend that even if the Court finds that Protter's claims are not time barred, he has failed to state a claim upon which relief can be granted. In an effort to expedite this analysis, the Court will address the RICO claims first, because dismissal of those claims would divest the Court of subject matter jurisdiction and obviate the need to consider the remaining arguments.
The RICO claims
The defendants make several arguments in favor of dismissal of the plaintiffs' RICO claims. The plaintiffs allege three separate causes of action under RICO pursuant to 18 U.S.C. § 1962(a), (b) and (c). Initially, the defendants contend that all three claims must be dismissed because Protter has failed to allege a pattern of racketeering necessary to support any RICO cause of action brought pursuant to section 1962. Alternatively, the defendants assert that the each of the three claims is deficient as follows: (1) the section 1962(a) claim should be dismissed because the plaintiffs are unable to establish injury as the result of investment of racketeering income; (2) the section 1962(b) claim should be dismissed for failure to allege acquisition or maintenance of an interest in an enterprise, namely Nathan's, through a pattern of racketeering; and (3) the section 1962(c) claim should be dismissed for failure to allege a RICO enterprise separate and distinct from the persons comprising the enterprise. The Court will address each of these arguments in turn.
1. Pattern of Racketeering